Rates on the rise?...and downPAINment verification

Mortgagenomics Canada

Everyone assumes that verification of down payment proceeds for a mortgage is a swift and miscellaneous part of the mortgage qualification process. When you think about it, why would it be difficult? If the applicant does, in fact, have the funds in their bank account, why then does it matter where it came from and how long it's been there?

One would argue that the biggest qualification hurdle in qualifying for a mortgage is income verification. However, if you ask a mortgage broker, they would likely reply that it is down payment verification. And the main reason being is that it is very much often overlooked and taken lightly by applicants…until your days away from your closing date and the lender is holding back your advance because they have discovered a stray $5,000 deposit into your bank account from which the origin hasn’t been confirmed or disclosed. Be aware, the unique thing about down payment verification is that its verification criteria is not so much a policy of the lender, but rather a policy of Canada’s Department of Finance (via the Financial Transactions & Reports Analysis Centre of Canada - aka FINTRAC). FINTRAC requires a 90 day history on any one deposit in to your bank account that exceeds $10,000 (individually, or cumulatively).

Here are some key points and verification criteria to be aware of when it comes to down payment:

*REASONABILITY - it needs to make sense. Other than when receiving a gifted down payment (from a directly related family member i.e. parents or spouse), expect the lender to request more details about the source of the funds. For example: A customer states that their employment income is the source of funds for a down payment. However, the down payment amount does not seem reasonable when compared to the customer’s stated occupation and provided employment documentation.

*TIMING of FUNDS in your BANK ACCOUNT - if the funds have been in your account for less than 90 days and have not been gifted, expect to provide a full 90 day history on all deposits that are considered part of your overall down payment proceeds. Some lenders may also require a full 6 month history for funds that originated overseas (foreign).

*USING BORROWED MONEY - this is allowed, BUT disclose it to your broker/banker at the time of the application as it absolutely needs to be accounted for in the mortgage qualification. You can certainly use money from your line of credit for a down payment, BUT your qualification amount will be scaled back, accordingly…and in most cases, significantly. Make your broker/banker aware right from the get-go to prevent a deal breaker situation on closing day. An experienced broker will address source of down payment during the pre-qualification phase of a mortgage application, but some won't and will leave it until later in the process - and this is when the massive ineligible-downpayment-reveal occurs. Imagine being told a couple of days before your closing date that your down payment funds are not eligible and that you have to come up with the same amount from another source! (i.e. mom, dad, cash out investments you were not planning to cash out, or maybe you just don’t have another source!!..yikes). Many applicants assume that using borrowed money for a down payment is fine and legit (which it is), but simply don’t realize the repercussions of it. Be aware, be forthcoming.

*QUALITY DOCUMENTATION - simply remembering that your name and account number must be displayed on the verification documents that you provide will answer any questions you may have if the documents you are about to submit are adequate. What if only your account number is on the statement but not your name? ANS: Provide a cross verification document that can link you to the account number (i.e. a void cheque, an older off-line statement, a screen capture of your account on a separate section of your online banking portal which portrays your name and account number, etc)

*PIECEMEAL DEPOSITING - this is probably the most tedious form of down payment verification and unleashes the highest level of frustration from all parties (lender, broker and applicant). AVOID small and excessive transfers of money between various bank accounts…this is a red flag for all lenders and is extremely confusing and frustrating for lenders to track. If moving money from one account to another is absolutely necessary, try to do so in one fell swoop once you have reached your target amount rather than frequent inter-branch transfer transactions. Just remember this, for every sum that you transfer into one account, you will have to provide a 90 day history of the account you transferred from (this will double your paper work and furthermore expose the details of the other account which could then, potentially, result in further unexpected requests from your lender)…avoid complexity, try and keep things simple.

*NOTABLE/UNIQUE SOURCES OF DOWNPAYMENT THAT ARE ACCEPTABLE - wired funds are acceptable but varying levels of verification are required depending on the amount and country of origin | proceeds from the sale of virtually any investment | proceeds from a grant | non-repayable gift from an immediate family member, relative or employer (the amount and source of the gift can vary with lender and loan to value ratio)

Rates:

Current 5 yr fixed rate range: 1.64% to 2.19%

Current Variable Rate Range: -0.80% to +0% discount off Prime (Prime Rate is 2.45%)

Comment: recent news about Pfizer’s COVID19 Vaccine in that it has yielded 90% effectiveness trials has poured optimism in to the bond markets. This bump in yields typically translates to an increase in mortgage rates. No hint from lenders if an increase in interest rates is pending, but heads up…this has been the the most significant burst of bond yield activity since June when rates aggressively began their decent to the 1% barrier. Brush up and check in with any lingering financing agreements you may have pending. Fixed or variable? My opinion…go with fixed.

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